Goldman Has No ‘Direct Access’ to Information on Heinz Account

By Patricia Hurtado and David McLaughlin -
Feb 22, 2013

Goldman Sachs Group Inc. (GS) doesn’t
have “direct access” to information about the beneficial owner
behind transactions in an account in which the U.S. Securities
and Exchange Commission said suspicious trading of H.J. Heinz
Co. (HNZ) occurred, the bank told the regulator.

The SEC on Feb. 15 sued “unknown” traders over suspicious
trading of Heinz’s options through what the regulator said was
an account at Goldman Sachs. The New York-based bank told SEC
senior counsel Megan Bergstrom that the account holder is a
Zurich private wealth client, Bergstrom said in a filing Feb. 20
in federal court in Manhattan.

“Goldman informed me that it does not have direct access
to information about the beneficial owner or owners behind any
particular transaction or position” in the account, Bergstrom
said in the filing.

The trades at issue in the SEC’s lawsuit came a day before
Warren Buffett’s Berkshire Hathaway Inc. (BRK/A) and 3G Capital Inc.
announced a $23 billion takeover of Pittsburgh-based Heinz, the
agency alleged in its complaint in federal court in Manhattan.
Using a Zurich-based account that involved call-option
contracts, the unidentified traders’ unrealized profit was more
than $1.7 million, according to the SEC.

Foreign Traders

The unidentified traders are “foreign traders and trade
through a foreign account,” the SEC said.

The commission provided a redacted copy of a trade blotter
for the account described as “a Goldman Sachs omnibus firm
customer facilitation account,” which shows that from Sept. 1
through Feb. 13, the only trading in Heinz occurred on the
latter date.

Since the Heinz takeover announcement, the traders’ option
purchases have settled and can be liquidated at any time, the
SEC said. SEC staff attorney David Brown said that on Feb. 15,
he informed Goldman Sachs representatives about the agency’s
plans and also asked the bank to “use whatever means they
have” to contact the traders.

U.S. District Judge Jed Rakoff, who is presiding over the
case, temporarily froze the assets in the account on Feb. 15 at
the SEC’s request.

Asset Freeze

The SEC on Feb. 20 asked Rakoff to keep the assets frozen
until the case is resolved, saying there is a “serious risk
that the substantial proceeds from the defendants trading will
leave the jurisdiction of the U.S. courts in the next few days
and may never be recovered,” according to a court filing.

Rakoff said any traders who object to a permanent asset
freeze must appear before him today to explain why he shouldn’t
grant the SEC’s request.

The defendants, using the Goldman Sachs account, invested
almost $90,000 in option positions the day before the deal was
announced, the SEC said. As a result, their position increased
to more than $1.8 million, a rise of almost 2,000 percent.

Omnibus Account

The SEC said that the traders had advance material
nonpublic information about the impending deal when they used an
omnibus account in Zurich to buy 2,533 out-of-the-money June
call options, which had a strike price of $65 on Feb. 13. Shares
closed that day at $60.48.

The purchase of the options, which expire on June 22, was
highly unusual, the SEC said. On Feb. 12, only 14 were
purchased, regulators said, while on Feb. 11, no such options
were bought. Since Nov. 14, no more than 61 such contracts had
been purchased on any other single day, the commission said.

Trading in the options gives the right to buy the
underlying shares and profit when the stock rises. The timing
and size of the trades were deemed highly suspicious by the SEC
because the accounts through which the traders purchased the
options had no history of trading Heinz securities in the last
six months.

The case is U.S. Securities and Exchange Commission v.
Certain Unknown Traders in Securities of H.J. Heinz Co., 13-
cv-1080, U.S. District Court, Southern District of New York
(Manhattan).